Types of profitability

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Concepts such as economic profitability and the one of financial profit They are really important for companies. This is because they are constituted as indicators of the different investments that a company undertakes. That said, throughout this blog article we are going to talk about the different types of profitability existing, mentioning how they are calculated.

What is profitability?

The cost effectiveness, in a broad sense, is the return generated by a certain amount of capital invested in a certain period of time. In this way, the resources used for an action or economic transaction would be compared with the revenue obtained in that action.

Therefore, they would be comparing all the materials, human resources and financial means involved in the economic action and with which certain results are expected to be achieved.

Types of profitability

There are different ways to calculate profitability and see if we are facing profitable investment or business. Depending on the calculation time, one could distinguish between the annual return and the average return. However, in this article we want to focus on the types of profitability general, which are the ones that will be shown below.

absolute profitability

As its name indicates, the accumulated profitability refers to the routput achieved over the life of an investment, including the benefit that has already been previously obtained thanks to that same investment. In this way, the total profitability can be known.

economic profitability

The economic profitability or ROI (Return On Investments) is a way of measuring the ability of a company's assets to generate profits, in other words, its economic efficiency. To calculate the economic profitability, the profit before interest and taxes or AIIB of the company is divided by the amount of the company's total assets (multiplying the result by 100 for get a percentage).

this way of seeing profitable investments does not take into account the financial structure of the company in question. It only measures the benefits that can be generated by the assets in your possession and your invested capital.

Financial profit

To the financial profit it is also called ROE, from English Return On Equity. ROE is calculated dividing the after-tax profit (net profit) of a business by its own funds of this one. In this way, it is a formula that relates the benefit of a company with the resources that have been invested to obtain said benefit.

commercial profitability

This return is calculated through the quotient between the profits from sales between the resources used in the sales themselves over a period of time. Commercial profitability, also called on numerous occasions profitability on sales, It is considered as a measure of evaluation of the commercial quality of the organizations.

return on money

Very simply, it is return obtained from investing a certain amount of money. Within this section is located the effective profitability, which with the Effective Rate of Return, takes into account the reinvestments of financial capital that occur throughout the period of an investment.

expected return

is the profitability that a company is confident of earning in the future of an investment you have made. A very common way of calculating the expected return is through the formula of the Net Present Value or GO. This formula is applicable in cases in which some of the data relating to the investment is unknown.

Guaranteed profitability

It is a means of calculating profitability, applicable to financial instruments such as savings accounts and pension plans, both guaranteed. Therefore, the guaranteed return is one that is maintained for a certain period of time.

geometric profitability

Also Known As Geometric Rate of Return, is useful for those situations in which there are several actions or financial operations, and you want to find the average profitability of this set of operations. In addition, it can also be used in cases where the valuation of such financial actions is changeable and cumulative.

In this way, it is more convenient to resort to the Geometric Rate of Return than to the average calculated arithmetically.

risk-free return

Profitability calculated on those risk-free financial contracts, among which the clearest example is the bank deposit.

Nominal and real profitability

It is very important to differentiate between nominal profitability and real profitability, as a consequence of the inflationary periods that money can go through. That being said, the nominal return does not take inflation into account in its calculation, unlike the real profitability, in which if inflation is considered within its obtaining.

Conclusion

LProfitability is a concept of enormous importance in companies and businesses. However, sometimes, a lack of knowledge of it can be witnessed, in addition to the fact that depending on the particular characteristics of the investment and financial operation, a way of calculating that adjusts properly should be chosen. For all this, we have considered it relevant to address the issue of types of profitability in this post.

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